Economics Journal: Can Kerala Kick Remittance ‘Curse’?

Can you have it all: high growth, strong human development indicators and an egalitarian society?

This is an old question that remains hotly debated today, not just in India but whenever the potential trade-offs between efficiency and equity are discussed.

As Kerala gets ready to go to the polls in a few days, the incumbent Communist-led Left Democratic Front is fighting off a vigorous challenge from the Congress-led United Democratic Front. If history is any guide and the state stays true to its history of anti-incumbency, there may be a new government in power in Thiruvananthapuram in a month’s time. Will that make a difference to the state’s development model?

For years the darling of development experts, non-governmental organizations and social activists, the “Kerala model” seemed to show that you could indeed have it all. The state achieved impressive levels of human development indicators in health, education and quality of life comparable even to some rich countries without a correspondingly high level of income.

Eventually, incomes, too, caught up so that today Kerala is a prosperous and fast-growing state with high human development levels. In the 2009-10 fiscal year, Kerala’s economy grew by 9.73% in real terms, compared with 7.4% for the country as a whole in the same period. The per capita gross state domestic product is a little over $1,000 which is comparable if not better than the national average.

--An average unemployment rate of 25% is high by any standard. What is also noteworthy is that the unemployment problem afflicts primarily the educated and skilled. There has also been an influx of migrants from Bihar and elsewhere to fill unskilled jobs that locals don’t want to do.

--A debt to GDP ratio of 34% in 2008, one of the highest in the country and the highest in South India, is difficult to sustain in the long run.

--The economy is heavily tilted towards services, which accounted for more than 60% of the state’s total economic activity in 2008-09. Manufacturing accounts for 22% but more than half of this is accounted for by construction.

So what’s going on?

As is being increasingly recognized, the crux of Kerala’s success has been a huge influx of remittances from the approximately two million Keralites working in the oil-rich Gulf States. According to estimates by economist K.P. Kannan of the Centre for Development Studies in Thiruvananthapuram, as much as 25% of the state’s revenues are accounted for by remittances as compared to only 3% for the country as a whole.

This explains how high income, rapid growth, and strong social indicators can co-exist with high unemployment and a slim manufacturing base. To this we can add a property boom which at least anecdotally suggests that house prices in Kochi are higher than in the burgeoning Silicon Valley of India, Bangalore, and which also explains the disproportionately large construction sector.

Economists often speak of the “curse of oil,” which occurs when an economy becomes excessively dependent on a single lucrative natural resource, which in turn squeezes the rest of the economy and distorts its structure. That is the story in many of the oil-rich Gulf states. Ironically, we see in Kerala the mirror image of this phenomenon, which we can call the “curse of remittances.”

The question arises: in the context of political uncertainty in the Gulf States and the possibility that migration and therefore remittances may be curtailed in the future, what are the prospects for the Kerala model? Does it only work like an athlete who breaks records pumped up on steroids but becomes a mere mortal without them?

Prof. Kannan told me via e-mail that the Kerala model is “eminently sustainable” because it’s founded on high human development as a foundation for growth. In his judgment, Kerala has moved beyond “basic issues” and is facing “second generation” problems such as “the need to improve the quality of higher education, quality of roads and power, create jobs for the educated labor force, investment in skill upgradation and development.” Will this be affordable given the state’s precarious finances?

I caught up by telephone with T.M. Thomas Issac, Kerala’s Finance Minister on the campaign trail. Dr. Issac, who’s an economist in his own right, agreed that the decline of remittances and the implication of this on the state’s finances and growth prospects evoked a “sense of urgency.”

His preferred approach is to shift Kerala to a different development trajectory focused on knowledge-intensive industries for which the state in theory should be suitable given its highly educated population. But he stressed that fiscal problems would not deter the government from pursuing what he called “total social security” for the people of the state and that this was as important as the development agenda.

Chances are whichever party comes to power next month, they’re going to have to deal with the delicate rebalancing of the Kerala model. Until now, the state has enjoyed being in the virtuous circle of high social spending and high remittances which together powered the state’s economy. The state’s fortunes have been tied to stability in the Gulf States. They are sure to breathe a sigh of relief in Thiruvanthapuram on both sides of the political aisle that at least so far it’s business as usual.